Lecture 10
SAVINGS AND THE CURRENT ACCOUNT

1. Terms

• CA = current account balance
• X = Exports of goods and services
• IM = Imports of goods and services
• NFIA = Net Factor Income from Abroad
• NUT = Net Unilateral Transfers
• TB = Trade balance
• GNE = Gross National Expenditure
• GDP = Gross Domestic Product
• GNI = Gross National Income (similar to GNP)
• GNDI = Gross National Disposable Income (denoted by Y)

2. Relationships

(1) TB = X - IM

(2) GNE = C + I + G

(3) GDP = GNE + TB = C + I + G + TB = C + I + G + (X-IM)

(4) GNI = GDP + NFIA

(5) GNDI = GNI + NUT

(6) CA = TB + NFIA + NUT

(7) Y = C + I + G + CA

3. Saving in the economy

• Private saving:   S_P = Y - C - T

• Government saving:   S_G = T - G

• National saving:   S = S_P + S_G = Y - C - G

4. Saving and the current account

From (7):

• S = I + CA
  
  
• S_P = I + (G-T) + CA

Private saving can be used to finance:
• Domestic investment
• Budget deficit
• Purchase of foreign assets

• CA = S_P - (G-T) - I
  
  
• CA will decrease due to:
  • Decrease in S_P
  • Increase in budget deficit
  • Increase in domestic investment